When starting your own business, one of the first considerations you’ll need to take into account is how you want to legally structure your company. Let’s take a look at the different options available and how best to approach deciding which is the ideal option for your business.
An Overview of Business Structures
There are several different structuring options available to SME owners, each of which has its own set of advantages and disadvantages.
Sole Trader
Most self-employed people who are the sole owner of their business are registered as sole traders. As the simplest structure it is one of the most popular options and data reported in May 2024 shows that there are more than 4.2 million self-employed people in the UK.
Advantages and Disadvantages of Being a Sole Trader
One of the main advantages of choosing this structure is how easy it is to set up and how little paperwork you will need to complete. It also affords you more privacy than other options, as your financial records will not be added to a public registry.
However, there are also some potential disadvantages to consider. As a sole trader you will have unlimited liability, which means that you will be personally liable if your business experiences debt. Additionally, you may experience greater challenges if you want to raise finances because lenders generally prefer more formal business structures.
Sole Trader Tax Requirements
To establish yourself as a sole trader, it is your responsibility to inform HMRC that you will complete an annual ‘Self Assessment’ return to pay tax on your profits. You must then report your earnings via ‘Self Assessment’ each year, so you’ll need to maintain an accurate record of all your sales and expenses.
Partnerships and Limited Liability Partnerships
One of the oldest types of business arrangement, a partnership is formed when at least two people agree to partake in a business venture with the aim of making a profit. In a traditional business partnership, all parties jointly own the business and are equally responsible for any liabilities or profits.
Alternatively, you could choose to set up a limited liability partnership to which the Partnership Act 1890 does not apply. This arrangement limits the individual liabilities of each partner without altering taxation requirements.
Advantages and Disadvantages of Partnerships
A partnership business structure has a good level of flexibility, as there is no requirement to have a director or other prescribed shareholder roles. Additionally, there aren’t any specific registration requirements, however it is generally a good idea to have a partnership agreement in place.
Conversely, each partner remains liable for any debts and there is the chance that disagreements can occur if there is no formal agreement in place.
If you choose to enter a limited liability partnership, you will need to file accounts with Companies House and ensure that all profits are distributed within the same financial year.
Tax Requirements of Partnerships
Partners are taxed on an individual basis, as if they were registered as a sole trader. As such, you’ll need to submit a ‘Self Assessment’ each year.
Limited Company
With a limited company, your business will have a separate legal identity from your own. There are currently more than five million limited companies in the UK, with data from Companies House illustrating that 500,000 new companies are created each year.
Advantages and Disadvantages of Running a Limited Company
Unlike sole traders and traditional partnerships, your personal assets as an owner would be protected if your company experiences financial difficulties. Additionally, there are often more financing options available to limited companies, which can support growth.
There are some disadvantages to consider, primarily the fact that you will be required to file a number of documents annually, all of which will be placed on a public registry that anyone can see. Limited companies are also more complex to run, and you’ll likely require specialised support from accountants and solicitors.
AK Tax & Accountancy is a knowledgeable partner that can provide your SME with the support needed to ensure that you have selected a structure that will allow you to access optimal tax benefits whilst remaining fully compliant.
Limited Company Tax Requirements
Corporation tax is charged on every limited company, however you may be eligible for certain tax benefits such as the Enterprise Investment Scheme, which exist to help smaller businesses to access finance by providing tax relief benefits to investors.
You will be required to prepare your accounts annually and file a Confirmation Statement, which will include information about your registered office, your shareholders, and your directors.
